Market commentary: Oil and the auto industry

Markets around the world had a rather positive session on Tuesday with almost all major indexes from Europe to US to Asian posting solid daily gains. Europe closed positive with the Euro Stoxx 600 adding 0.82% trailing the Euro Stoxx 50 up 1.31% and the FTSE 100 also up 1.32%.

US markets opened higher and continued to rise throughout the session supported by positive earnings releases, extending the European rally.

Commodities joined the uptrend, with the main agricultural futures and precious metals posting some gains after some days of sluggish performances driven by global growth’s concerns and the realization that China’s economy is perhaps slowing down more than anticipated.

The rally in the equity markets was main supported by oil prices that have rebounded over the last few trading sessions bringing the commodity off its multiyear lows and solidly above the physiological level of $50 per barrel.

After the WTI Index closed at $53.05 and the Brent Index closed at $57.91, some analysts and investors are pondering whether the commodity has finally bottomed and it is starting a sustain rebound. A CNBC contributor pointed out yesterday that, historically, after sudden and extended drops, the price of oil has usually rebounded substantially in the 6 months following the sharp decline.

While in my opinion it is too early to test this hypothesis, it is also true that throughout the ongoing earnings seasons, oil producers and drilling companies have announced sizable spending cuts across the board, along with the closing of several production sites, cuts in their workforce and cuts in dividend payments to be executed through the current year.

Markets have started to account for the high costs affecting a large number of oil producers operating outside state-run OPEC’s reserves and to re-assess the sustainability of today US’s high production level if the price of oil was to remaining in the lower $40s. Although it may be too soon to shout “rebound”, the recent price gains may very well turn into a price stabilization so desperately sought out by markets and investors.

The ongoing earnings seasons and monthly sales statistics have also highlighted another industry, other than the often mentioned airlines sector, that has largely benefitted by the combination of low oil prices and still relatively easy credit’s access: the US auto industry.

Fiat Chrysler Automobiles NV’s reported a profit increase of 1.5% for its US unit driven by higher sales for Jeep and Ram pickups. The same unit also posted an increase of 8.3% in its revenues to $23 billion and an adjusted profit of $962 million. Shares rose 3.3% in New York closing at $13.95 and bringing the gain for 2015 up to 20.47%.

Ford Motors & Co. also reported convincing results posting much less losses than previously forecasted, beating estimates on revenues by $1.1 billion and Earnings per Shares (EPS) by $0.03.

Additionally, the Company managed to increase its January sales by an overall 15.3%, with the trucks category adding over 20% on the back of strong demand for its popular F-Series. Shares of Ford rallied 6.39% over the last two trading session, and with a dividend yield of 3.83% the stock may prove a winning option offering both sizable income and substantial upside potential.

General Motors Co. is due to report today, but investors have already received good news ahead of the earnings release after that yesterday the company announced a 18.3% jump in January sales.

The company recorded sales increases across the board with Chevrolet adding 20%, Cadillac adding 2.6% and the GMC brand adding 28.6%. Although shares of General Motors rose 2.63% closing at $ 33.98, the stock remains rather volatile on the back of several recalls and not perfectly managed PR issues that analysts think have not yet been put entire to bed.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.